The bank of Mum and Dad

After decades of significant growth in Australian property, it is increasingly difficult for younger generations to get their foot in the property market – especially in Sydney and Melbourne. So, for well-meaning parents wanting to financially help their children, research is key when considering the options.

Domain’s March 2022 House Price Report revealed Sydney’s median house price was $1,590,932 and unit price was $796,524. Based on a typical 20 per cent deposit, a would-be purchaser of a freestanding house in Sydney would need a $318,186.40 deposit plus applicable stamp duty and transactional costs just to buy in.

Even with property prices falling in some capital cities, the Australian dream of home ownership now seems out of reach for many young people ― so it’s not surprising to see many parents wanting to assist their children to purchase their first home. But before diving in, family members should all be aware of the pros and cons of the key strategies.

1. Going guarantor

Being guarantor for your child’s home loan is very common but can be fraught with pitfalls if the arrangement is not appropriately structured. These include:

• the full loan (not just a part), being linked to the guarantee
• the loan being structured in such a way that the guaranteed part is not reduced in the first instance
• the bank requiring security over your property, which may prevent you from being able to sell while the guarantee is in place
• the ‘standard’ guarantee terms and terms of your existing home loan may inadvertently result in your house being used as security where your child uses the same bank as you
• the bank having recourse against you if your child defaults on the loan, which may result in you having to draw upon your retirement savings to pay off the loan ― or in the forced sale of the property or even your house.

Understanding the loan structure and your rights and obligations is key. The structure most beneficial to your children may not be the one most appropriate for you. Seek advice from a lawyer who can work with you, your financial adviser and mortgage broker to ensure that you are protected. Never sign a guarantee document without first getting advice.

2. Gifts to children

The simplest way of assisting children with purchasing a home is to gift them a sum of money which can be used as a deposit. While this is the simplest strategy and does not require documentation, the main risk is that the gift will form part of the child’s personal or family assets – in which case it may be vulnerable to dissipation if the child goes through a divorce or de-facto relationship breakdown.

Where it is intended to give all children a similar gift, it may also be necessary to include an ‘equalisation of benefits’ clause in your Will to ensure any other children who have not received their gift are given a ‘top-up’ on their inheritance.

It is important that any intention to gift money to children is considered as part of your overarching financial planning strategy as:

• you may require access to the funds for retirement
• any gift to children may still be considered as an asset for Centrelink purposes.

3. Loaning money

A common strategy to protect your financial assistance is to document it as a family loan agreement. This can provide numerous benefits including:

• the bank has no recourse against you (unlike with a guarantor arrangement)
• the loan arrangement may enhance asset protection for your children should they go through a divorce or separation
• for estate planning purposes – as the child will owe money to the estate. If the parents’ Will includes testamentary trusts, on death, the loan can be notionally paid back, received through the testamentary trust controlled by the child, which can then re-lend the funds back to the child. Such an arrangement could potentially provide the child with significant tax and asset protection benefits.

Where asset protection is paramount, properly drafted legal documentation is the key.

In most cases, a DIY family loan agreement could be seen as a ‘sham arrangement’ more accurately characterised as a gift or alternatively unenforceable as a result of the statute of limitations that may prevent the loan from being enforced (depending on the terms) ― where no attempt to seek repayment has been made within a particular period of time (usually six years). While it is tempting to try to save money by drafting your own agreement, given these stakes, you should seek legal advice.

4. Purchasing property with children

An under-utilised strategy is purchasing property as ‘tenants in common’ with your child. Under this arrangement, the property could be purchased in specific percentages; for example, 20 per cent in your name and 80 per cent in your child’s name.

While such an arrangement is likely to provide a greater degree of protection for the 20 per cent interest as the child would not legally own it, there are potential problems, including:

• the bank requiring a first mortgage on the property
• the child may want to draw on equity or sell the property and purchase another
• while you can benefit from an increase in the value of the property if the value of the property increases, like any other asset, you also face the risk of negative equity in a falling market
• where it is intended for your child to ‘buy you out’ during your lifetime, stamp duty may apply on transfer of the remaining interest.

Where this arrangement is implemented, it is necessary to obtain estate planning and financial advice to ensure your child can receive the remaining interest in the property through your Will, and also that it does not adversely affect them from any concessional duty or first home owner grant that they may be eligible for.

5. Rent-to-buy arrangements

Where you have sufficient capital to purchase a property, a ‘rent-to-buy’ agreement can be drawn up with your children. In doing so, your children pay rent (usually at market rates) to yourself, which is then converted to equity in the home upon your death when complementary estate planning mechanisms are utilised.

A loan agreement is drafted documenting the terms of the arrangement, with payments made by your children constituting a loan to yourself. The agreement should also cover off on other considerations, such as who is responsible for specific costs associated with the property (such as repairs and maintenance).

Your Wills are then drafted such that, at the time of your death, the loan amount is redirected into equity in the property. There are various benefits to utilising this method, such as:

• potential tax savings by your children and yourself
• asset protection for your children against divorce, separation or bankruptcy.

In order to fully recognise these benefits it is important to speak to estate planning and financial advice professionals.

6. Granny flat arrangements

Another under-utilised option is to undertake a ‘granny flat’ arrangement. Under this strategy, the owner of the property transfers an interest in the property to someone in exchange for being granted a right to occupy the property for life. This can be any type of property, not just those that are commonly known as ‘granny flats’.

This type of strategy may be suitable where you own a property which is large enough for multiple family members to live in, or where the land itself has capacity for a separate residence to be built on.

As you would be disposing of an interest in property, the implementation of granny flat arrangements requires consideration of a number of issues including, but not limited to, your overall financial security, estate planning implications, social security entitlements, tax and stamp duty.

Always seek specialist advice

While helping your children purchase their first home is exciting, it can have inadvertent impacts on your financial position, security and retirement plans in addition to creating estate planning issues. We recommend that you always seek specialist advice on the most appropriate strategy for your circumstances.